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Sort through the wealth of information on the Internet to get what is pertinent to your investmentsMon, 19 Nov 2018 22:00:55 +0000en-UShourly12 best ETFs to buy right nowhttps://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/
https://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/#commentsSun, 28 Oct 2018 19:00:47 +0000https://www.adviceforinvestors.com/?p=7130The peak six months of market activity has arrived, and seasonal investing analyst and portfolio manager Brooke Thackray picks the two sectors—and names two specific ETFs—that he’s targeting to rotate funds into.
If you are searching for a rewarding relationship (to yourself, if not necessarily to each other), go no further than the ‘odd couple’ of
]]>The peak six months of market activity has arrived, and seasonal investing analyst and portfolio manager Brooke Thackray picks the two sectors—and names two specific ETFs—that he’s targeting to rotate funds into.

If you are searching for a rewarding relationship (to yourself, if not necessarily to each other), go no further than the ‘odd couple’ of consumer staples and technology stocks in October. So says Brooke Thackray, a Toronto seasonality-based financial analyst and author of an annual eponymous book series, Thackray’s Investor’s Guide, coming out in late November.

Despite the myriad differences between the two sectors, including their reasons for drawing market interest, both are historically strong in October, making them a perfect match for a seasonal investor’s portfolio, he explains.

As the peak six months of market activity approaches, the analyst is preparing to rotate HAC’s holdings. (The market’s top-performing period typically begins around Oct. 28 and lasts until May 5, based on historical data.)

“Right now, we have a lot of cash on hand that we’re starting to put to work but we’re expecting to be substantially more invested by the end of October,” says Mr. Thackray.

Commenting on consumer staples, the analyst notes that the sector in the United States had underperformed the S&P 500 through the first half of 2018. However, in June, the sector began to turn around. Since July, it has slightly outperformed the S&P 500.

In anticipation of volatility from summer into October, “investors themselves are looking for companies that are more defensive. For us, this is a good setup. It’s a good sector to be in at this time when the market is trying to figure out what to do,” says the analyst.

Market leader just reaching its peak period

As for Mr. Thackray’s case for the technology sector, he points out: “It’s been a market leader for a while . . . and here we are coming up to its really strong seasonal period.”

Technology stocks tend to do best from Oct. 10 or so through the end of November. Many businesses examine IT-related purchases at the end of the year, to say nothing of consumer interest leading up to Christmas. “The idea is to be out on technology when there’s a lot of excitement.”

Mr. Thackray advises investors to avoid energy stocks in the fall since they generally perform poorly at this time, particularly oil stocks. In fact, because of the energy sector’s prominence in the Canadian stock markets, the analyst recommends avoiding Canadian investment altogether over the autumn months.

“Nobody’s picking on Canada,” he says, but he gives little weight to speculation that oil prices could reach US$100 a barrel, and buoy up the local economy, because of sanctions on Iran.

The conclusion of North American Free Trade Agreement negotiations and the emergence of its successor, the United States-Mexico-Canada Agreement, on Oct. 1 are unlikely to spur domestic capital markets or the economy, Mr. Thackray adds.

“So far the stock market hasn’t reacted with enthusiasm. I don’t expect any change at all actually.” He says the new agreement’s terms are less favourable for Canada than the previous one. “The deal doesn’t help the stock market other than providing some clarity on capital spending.” Lower uncertainty may result in the Bank of Canada raising interest rates, which would further dampen stock market growth, the analyst argues.

2 best ETFs to buy right now

Mr. Thackray says: “The funds I work with, we generally buy sectors of the market, so we buy ETFs.” Accordingly, he names the SPDR Consumer Staples Select Sector Fund (NYSEARCA—XLP) and the SPDR Technology Select Sector Fund (NYSEARCA—XLK) as his ‘best buy’ picks for US exposure.

However, Mr. Thackray stresses: “The technology trade would be longer, but in this case, it would only be for the month of October.” The technology SPDR’s assets are also made up of major firms like Microsoft Corp., Apple Inc., Intel Corp., and Cisco Systems Inc.

Mr. Thackray says: “We’ve seen rapid outperformance over the last couple of years. Technology stocks have outperformed outside of their seasonal period as we’ve had a structural change to the marketplace.”

Since June, the sector has settled down somewhat and performed in line with the broader market. “It’s an expensive sector, but it’s the leading sector of the market,” says the analyst. XLK offers a 1.27 per cent dividend yield.

]]>https://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/feed/0An ETF and 6 “gassy” stocks to buyhttps://www.adviceforinvestors.com/news/us-stocks/an-etf-and-6-gassy-stocks-to-buy/
https://www.adviceforinvestors.com/news/us-stocks/an-etf-and-6-gassy-stocks-to-buy/#commentsThu, 11 Oct 2018 19:00:22 +0000https://www.adviceforinvestors.com/?p=7074Legendary New Brunswick oil (and everything else) magnate K.C. Irving’s three sons were both affectionately and derisively known as Oily, Gassy and Greasy. Seasonality financial analyst Don Vialoux’s use of the term “gassy stocks” reminded us of them. Would that Mr. Vialoux’s natural gas stock picks achieve the success of the Irving clan.
Whether the weather
]]>Legendary New Brunswick oil (and everything else) magnate K.C. Irving’s three sons were both affectionately and derisively known as Oily, Gassy and Greasy. Seasonality financial analyst Don Vialoux’s use of the term “gassy stocks” reminded us of them. Would that Mr. Vialoux’s natural gas stock picks achieve the success of the Irving clan.

Whether the weather is hotter or colder than usual, it pays to invest in natural gas, but beware the trap of direct gas investment, says seasonality-based financial analyst Don Vialoux. Based in the Greater Toronto Area, Mr. Vialoux co-founded popular investing-related websites timingthemarket.ca and equityclock.com with his son and fellow analyst, Jon.

The elder Mr. Vialoux explains that in historical terms, the price of natural gas and “gassy stocks” tied to the commodity perform best from the end of August until the third week of December.

Much of the increase in natural gas use and corresponding bullishness on gassy stocks is due to buildings requiring more heat as the seasons change. However, this year, a spell of hot, humid weather across the eastern parts of Canada and the United States kicked off greater natural gas demand to power air conditioners right from the beginning of the historic period of seasonal strength, says Mr. Vialoux.

Inventories low at start of high-demand season

What’s more, natural gas inventory levels are already the lowest they have been for about a decade, he adds. Meanwhile, the advent of hurricane season opens up the possibility of production shutdowns at gas platforms in the Gulf of Mexico. Any interruptions in natural gas production in the area would drive prices (that of the commodity as well as those of related companies) upward. The already-low natural gas inventory would amplify any supply issues and the degree of consequent price hikes, the analyst further argues.

“There’s a lesson to be learned here. It’s a structural problem with the commodity futures as opposed to a problem with the commodity itself,” the analyst explains. Futures contracts have specific monthly expiry dates. This in turn greatly limits traders’ ability to cash in during the seasonally strong period at a favourable price point. Mr. Vialoux says, in effect: “The commodity has much more, shall we say, implied volatility in it.”

An ETF to buy for US gas play

For exposure to the natural gas industry in the United States, the analyst recommends buying shares of the First Trust Natural Gas ETF (NYSEARCA—FCG). The ETF tracks the ISE-Revere Natural Gas Index, which is made up of a basket of US energy stocks that have a heavy emphasis on natural gas. Even so, all of the ETF’s constituent companies, including Devon Energy Corp. (NYSE—DVN), Cabot Oil & Gas Corp. (NYSE—COG), and even Encana Corp. (TSX—ECA; NYSE—ECA) have major energy-related interests beyond natural gas.

4 gassy stocks to buy for Canadian gas play

For exposure to Canadian natural gas, “it’s probably best to buy a basket of gassy stocks to play this trade,” says Mr. Vialoux. “I guess the most well-known gassy stock in Canada is Encana.”

The analyst concedes that opposition to pipelines and other energy infrastructure could dampen gains among natural gas-related Canadian companies. On the other hand, he asserts that a Kitimat, BC liquefied natural gas (LNG) export plant and attendant pipeline, proposed by a consortium led by Royal Dutch Shell PLC, is much likelier to succeed than, for example, the Trans Mountain pipeline, given healthy First Nations and other local support.

“If Shell announced it would go ahead with this project, that would be a positive thing for a lot of the gassy stocks.”

“These are all gassy stocks that have been kind of going sideways for the last couple of months,” says Mr. Vialoux.

Looking at the economy and markets more generally, the analyst says: “Certainly, the US markets have momentum right now. The earnings picture continues to be very, very strong for the large cap companies in the US.” Among S&P 500 companies, earnings rose an average of 25 per cent year-over-year in the second quarter, and the market expects them to rise 20 per cent in the third quarter and 17 per cent in the fourth quarter.

By comparison, Canadian markets peaked on July 13 and have stayed fairly flat since. Mr. Vialoux says that in earnings terms: “The news (from Canadian companies) has been good but it needs to be very, very good for it to continue helping market upside.”

]]>https://www.adviceforinvestors.com/news/us-stocks/an-etf-and-6-gassy-stocks-to-buy/feed/03 oil & gas stocks to buy nowhttps://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now-2/
https://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now-2/#commentsThu, 20 Sep 2018 18:58:33 +0000https://www.adviceforinvestors.com/?p=7009PI Financial portfolio manager Guy Lapierre picks three oil and gas stocks and a sugar producer as his ‘best buys’. [ed.--How did a sugar producer get in with his oil and gas picks? Well, it is an energy stock of sorts, isn’t it?]
Before last winter’s correction hit, Vancouver-area PI Financial portfolio manager Guy Lapierre cautioned
]]>PI Financial portfolio manager Guy Lapierre picks three oil and gas stocks and a sugar producer as his ‘best buys’. [ed.--How did a sugar producer get in with his oil and gas picks? Well, it is an energy stock of sorts, isn’t it?]

Before last winter’s correction hit, Vancouver-area PI Financial portfolio manager Guy Lapierre cautioned investors to be careful not to burn themselves by hanging on to high-flying (especially US) blue-chip stocks for too long. At the time, the markets were still looking forward to better corporate earnings across the board.

A week after he shared his views in our pages, in late January, the market had transformed into the shakier animal that it is today. So, what now?

“Broadly speaking, our reaction to the market changes since we last spoke is, we’ve been looking to protect any profits,” says Mr. Lapierre.

Specifically, he has adjusted exposure to equity by 10 per cent in the portfolios he devises for his clients in favour of more fixed-income investments. At present, his growth portfolio is made up of 60 per cent equities and 40 per cent fixed income, while his growth and income portfolio consists of an even split between equities and fixed income.

Summing up his more defensive position at present, the portfolio manager says: “Fixed income is about getting your money back. Equity is about growth.”

Time to add some fixed-income securities

Mr. Lapierre points out that interest rates have risen over the last four months to five months, increasing his willingness to take on some longer-term fixed income investments, although he adds that he has avoided any bonds with a term five years or longer.

“That leaves us a little lighter on cash . . . but we’re quick to take profits on the equity side.

“We did some active trading with Apple, and we have some long-term positions that are still very profitable to sell, but not as profitable as eight months ago.”

Thus, he has added major corporate bonds yielding between four per cent and 4.5 per cent annually to his clients’ holdings, which the portfolio manager describes as an acceptable return under current circumstances. Mr. Lapierre has also invested in mortgage-backed securities yielding from seven per cent to 7.5 per cent annually.

The portfolio manager urges investors to pay attention to the ease of exiting from any fixed income investments they take on. “First and foremost is liquidity.”

The recent mortgage-backed securities that he bought into, for example, may be completely sold back to the issuer if necessary. “At a discount, of course, but we can get our money out.”

The greenback is still king

Mr. Lapierre notes as well that he is betting on an overall rise in the US dollar against other major currencies, including the loonie. International trade conflict or inflation would buoy the currency upwards, he says.

“There is no place to go. In a trade war, arguably the strongest hand is played by the Chinese.” However, the euro and yuan are both vulnerable, the portfolio manager argues. As such, he says, “We are proponents of the king dollar.”

As for gold (and its miners), he says: “We see gold as disconnected from inflation.” Mr. Lapierre asserts that gold price changes generally reflect shifts in the value of the US dollar rather than supply and demand issues specific to gold.

“I don’t see gold as a holder of wealth. There’s just too many other commodities you can trade like gold.”

3 oil stocks and . . . a sugar producer

Looking ahead over the next quarter to half-year, Mr. Lapierre says: “We’re constructive on select Canadian oil companies, the US retail banking sector, water in general, and the German economy in specificity.”

Explaining his endorsement of Pembina, he says: “It’s summed up in the absence of a pipeline to Tidewater.” The company’s pipelines are doing brisk business and its dividend yields 5.31 per cent, with little debt to hamper it. “We’ve added AltaGas, Pembina Pipeline, and Suncor Energy Inc. (TSX—SU; NYSE—SU), reflecting the strength in oil prices, partially attributable to Middle East tensions rising. These three fossil fuel investments provide significant dividend income.”

Regarding Rogers Sugar, a long-time, “high-conviction pick” for Mr. Lapierre, he notes that the company’s yield has become even sweeter since dropping about 22 per cent from a peak share price of $6.29 on Jan. 2. Since he was happy to recommend Rogers Sugar when it was more expensive, the portfolio manager says simply: “It’s cheaper, so we like it.”

(Disclaimer: Mr. Lapierre held no positions in any stocks named above at the time of writing.)

]]>https://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now-2/feed/02 stocks with high dividendshttps://www.adviceforinvestors.com/news/oil-and-gas-stocks/2-stocks-with-high-dividends-3/
https://www.adviceforinvestors.com/news/oil-and-gas-stocks/2-stocks-with-high-dividends-3/#commentsSun, 16 Sep 2018 18:58:30 +0000https://www.adviceforinvestors.com/?p=7001A global oil and gas stock that yields about six per cent and a financial services stock yielding about 10 per cent are Toronto-based portfolio manager Michael Sprung’s two favourite stock picks. He says Canada “is very well-positioned to participate in a global economic recovery”.
While volatility since winter “may or may not be indicative of
]]>A global oil and gas stock that yields about six per cent and a financial services stock yielding about 10 per cent are Toronto-based portfolio manager Michael Sprung’s two favourite stock picks. He says Canada “is very well-positioned to participate in a global economic recovery”.

While volatility since winter “may or may not be indicative of a protracted market downturn”, it does signal shifting investor priorities, suggests Michael Sprung, founder of Sprung Investment Management in Toronto. He is a chartered financial analyst who serves as president and a portfolio manager at his namesake boutique investing firm.

Elaborating on the shift, Mr. Sprung explains: “I’d very much describe the last year as price-driven markets.” That is, investors largely put money into companies simply on the basis that their shares were rising, thus further inflating prices.

The portfolio manager notes that the major technology stocks and other, more speculative corners of the economy (such as medical marijuana stocks) had driven most of the increases over the last couple of years up to January, despite relatively negligible or even negative earnings. Investors during the period chose to bet on future growth.

By contrast, the recent ups and downs are “forcing people into more higher-quality securities,” says Mr. Sprung. “It’s going to be much more of a ‘show-me’ kind of a market where people are going to want to see the road to earnings and the road to profitability,” he predicts before adding: “Quality of earnings is going to become much more important.”

Avoid tech stocks and long-term fixed-income

The analyst advises against holding the major technology stocks, as well as stocks in emerging industries, given their room to fall. He further recommends that investors avoid taking long positions in fixed-income investments, especially as interest rates rise and capital moves to other areas of the market in anticipation of growth. “We are very short in almost all of our fixed-income investments.”

Generally speaking, the larger economic outlook remains healthy, with a caveat. Mr. Sprung recalls that before the pullback in winter: “Everybody was talking about synchronized global growth from an economic point of view.”

Key to this rosy prognosis was simultaneous growth in both emerging and developed economies. In fact, the consensus expected better worldwide economic expansion this year than in the last five. However, Mr. Sprung admits: “A lot of that future will be dependent on the global trade issues.”

In Canada, the picture is also sound. “The country is very well-positioned to participate in a global economic recovery,” says the analyst. If NAFTA negotiations are positive, closeness to US growth further sweetens prospects back at home.

The analyst argues that the energy sector offers the best domestic potential for share prices to rise. After years in the doldrums, the energy sector is rising again. Because of the previous slump, many oil and gas stocks offer good value to shareholders, Mr. Sprung argues. “Those that have had stronger balance sheets and better management have been able to take advantage of some of the opportunities that have come up.”

2 stocks with high dividends

Reflecting this view, his first ‘best buy’ pick is Vermilion Energy Inc. (TSX—VET; NYSE—VET). The oil and gas stock is very well-diversified with operations in Canada, Australia, France, the Netherlands and more.

Vermilion is able to generate free cash flow at current energy prices and its balance sheet is “very solid”, enough to recently hike its dividend by seven per cent to $2.76 a share annually.

“Given their position, this is a company that has proven itself to be very savvy,” says Mr. Sprung. He praises Vermilion’s investment in Spartan Energy Corp. assets on “very, very advantageous terms” and points out that its Australian presence means it can serve emerging markets in the Far East. “It is one that people should seriously consider.”

Both Vermilion and financial services stock Alaris Royalty Corp. (TSX—AD), Mr. Sprung’s second ‘best buy’, boast very high dividend yields, meaning that shareholders can look forward to being paid nicely even if the wait for price gains turns out to take longer than hoped.

The analyst says of Alaris: “It’s a company that’s selling at a compelling valuation.” He explains that shares took a lasting hit because of issues at several underperforming companies in the Alaris stable. (The company makes capital investments in other firms in exchange for ownership of preferred shares.)

Its lofty dividend yield stoked further share-depressing fears of a cut. However, only five out of 16 Alaris partners were underperforming, and Alaris has already largely resolved the under-performers’ cash flow problems, according to Mr. Sprung. “As they deploy more funds going forward, they will create more cash flow and there will be more dividend increases possible,” he predicts, leading the market to notice the positive trend coming into play.

]]>https://www.adviceforinvestors.com/news/oil-and-gas-stocks/2-stocks-with-high-dividends-3/feed/0Are you richer than you think?https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think-2/
https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think-2/#commentsThu, 13 Sep 2018 18:58:46 +0000https://www.adviceforinvestors.com/?p=6999If China starts to sell a small portion of its holdings of US bonds and bills, US interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling
]]>If China starts to sell a small portion of its holdings of US bonds and bills, US interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling they are richer than they think.

Bank of Nova Scotia says it best: “You’re richer than you think.” What does it mean to ‘think’ you’re rich? In our never-ending quest to buy-low-and-sell-high, we recognize that optimism accompanies stock market tops, and that ‘thinking you’re rich’ is a form of financial optimism. How would we measure it? How do we measure how rich we feel?

Economists label that feeling ‘the wealth effect’. The wealth effect is the widespread belief that we are richer than we actually are. In other words, Scotiabank is wrong. And what makes us feel so rich? Our homes are worth more than we thought and our investments are all up. And what do we do when we feel rich? We spend more money than when we felt poor. We take more financial risk than when we thought we were poor.

In developing judgment about the stock market, it is important for us to objectively observe optimism in others while we remain detached. It is important for us to take less financial risk when everyone else feels richer, and take more financial risk when others are fearful.

Next time you drive through the streets of your home town, check out the cars. Are there more new luxury cars now than a year or two ago? What is the percentage of shiny new cars to rusty old clunkers? Is the wealth effect manifesting in the streets of your neighbourhood?

Check new car sales growth for 2018: the fastest sales growth was achieved by the Toyota Prius. (This is ‘environmental effect’, not wealth effect.) Second prize goes to the Porsche 911. Definitely wealth effect! “I feel rich; I will buy a new Porsche.” Check it out next time you go for a drive: Is the wealth effect evident in your own neighbourhood? How about your own drive-way?

The wealth of markets

Let us review the financial markets: just how wealthy are we?

The US stock market has calmed down again. After the wild volatility of February and March, June’s sluggish action is boring and is lulling investors back to complacency. Mr. Trump has given us enough economic news to slam-dunk this sleepy market. People know that trade wars have begun, but the market is not going down. American investors don’t believe the news. They’re not worried. Somehow, they feel safe. Don’t get caught off guard! The long-term uptrend of the S&P500 ended five months ago in January of this year and the first down tick of the new long-term down trend was violent. When the next leg of the downtrend begins, it could be just as violent as the one in February.

The TSX Composite Index made a marginal new high in June and is lulling Canadian investors into complacency. Don’t be fooled.

At the 2007-8 stock market top, investors knew about US mortgage problems, but didn’t react. Finally, the events of the day overwhelmed them and the downtrend began in earnest. Today we have the same situation regarding global trade wars: we know it’s happening, but most are not yet taking defensive action. (Defensive action means selling your stocks or equity mutual funds.)

On the cusp of a downtrend

In summary, both the US and Canadian stock markets are in the early stage of long-term downtrends.

Long-term interest rates (measured by the yield of long-term treasury bonds) are in long-term up trends in both Canada and the United States. The upturn began approximately 2 years ago and has been confirmed by rising short-term interest rates in both countries.

The US dollar, measured against the basket of non-US currencies, is in a downtrend that began in December 2016. Notice the stability of currencies as this global trade war begins. The US dollar has risen modestly since April, at the very time the Americans fired the opening salvos in the Battle of the Embargoes. Apparently, currency traders/investors collectively believe embargoes and counter-embargoes are moderately good for the US dollar. This is a good lesson in market psychology: negative or surprising news doesn’t necessarily make the markets move. Later in the cycle, news of yet another trade tariff will send currency markets into a tizzy. At this stage, the ‘complacency’ stage, bad news is mostly ignored.

The Canadian Dollar vs. US Dollar is in a long term up trend and is just ending a short-term decline within that up trend.

Gold is an interesting economic situation. In trade wars and currency crises, gold usually rises because people see it a safe haven. But not this time. Even though a global trade war has begun, the price of gold vs. US dollar continues to drift lower. Gold’s up trend started in December of 2015 with a sharp rise to August 2016. Since then, gold has moved sideways in a series of zigzags, each zig being smaller than the last. This chart pattern is called a triangle and illustrates constantly decreasing volatility.

Investors are gradually losing interest in the precious metals. Classically, the way a triangle resolves is by ‘breaking out’ of the pattern in one direction or the other. When emotion (i.e. volatility) returns to the markets, if gold moved decisively UP, the long-term uptrend will be confirmed. If it breaks decisively DOWN, a long-term down trend will be in effect. Stay tuned.

Theoretical note: Market forecasters analyze this situation and try to predict the direction in which the breakout will occur. Trend followers (like me) wait for the breakout. Right now, many forecasters are predicting gold will go up because of the trade wars. Forecasters and traders who think like this are ‘bullish’. Market psychologists observe their news-based opinion and call it ‘optimism’. They maintain that gold will continue its short-term decline until that bullishness changes to bearishness. This illustrates how the cross currents of the markets interact. One group has a perfectly logical opinion—a second group has another perfectly logical opposing scenario. And a third group, the trend followers, waits to see how the situation resolves.

Going forward

Energy prices. Oil has been in a long term up trend since Feb 2016, but natural gas has been in a down trend since June 2014. We expect both of these long-term price trends to continue.

Strategy. Buying and holding stocks or equity mutual funds for the long term is not a wise investment strategy at this time. It is time to reduce our exposure to risk. Remember what American advisor Richard Russell once said: “In a bear market, whoever sells first wins.”

Because interest rates are rising, invest in short-term bonds or GICs, not long term. But, if you still have a mortgage, abandon floating rate or short-term mortgages and choose the 5-year fixed rate mortgage.

Because the US Dollar is going down vs ‘the basket’ and the Loonie is going up vs. US Dollar, there is no clear currency advantage to participate in foreign investments.

Because gold is drifting sideways, we would not change our current precious metals investments until gold breaks out of the pattern mentioned earlier.

Energy stocks are a mixed bag: but the overall trend of the stock market is down. Resource stocks are for short-term traders only.

The wealth effect causes ordinary investors to take inappropriate action at exactly the wrong time in the economic cycle. But the most dramatic inappropriate action is at the international level. Mr. Trump, with his ‘bar-room brawler’ style of negotiating, is acting as if prosperity is a ‘given’. He assumes that America is prosperous and that he is negotiating from a position of strength.

But in his negotiations with China, he has forgotten one important fact: the Chinese are the world’s largest investors in US T-bills. America has been running a deficit for decades, and China is the main buyer of American debt. If China reacts to Mr. Trump’s tariffs and embargoes by slowing down their endless purchases of US debt, America might have to raise short-term interest rates to get their debt financed. And, if China stops buying US paper, interest rates could go significantly higher. And if China starts to sell a small portion of its holdings of US bonds and bills, American interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling they are richer than they think.

This is an edited version of an article that was originally published for subscribers in the July 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think-2/feed/03 stocks to buy in a continuing bull markethttps://www.adviceforinvestors.com/news/us-stocks/3-stocks-to-buy-in-a-continuing-bull-market/
https://www.adviceforinvestors.com/news/us-stocks/3-stocks-to-buy-in-a-continuing-bull-market/#commentsThu, 23 Aug 2018 18:58:20 +0000https://www.adviceforinvestors.com/?p=6928US fundamentals remain very strong, and even though this is one of the longest bull markets in history, the economic recovery is also one of the shallowest in history, suggesting that the bull market may go on for some time to come. John Stephenson picks his three favourite stocks to buy now.
US corporate earnings are
]]>US fundamentals remain very strong, and even though this is one of the longest bull markets in history, the economic recovery is also one of the shallowest in history, suggesting that the bull market may go on for some time to come. John Stephenson picks his three favourite stocks to buy now.

US corporate earnings are poised to extend a run of double-digit growth in the second quarter, providing a balm for a stock market that has languished as investors have grappled with threats ranging from fractious trade relations to tightening monetary policy.

Analysts expect earnings from S&P 500 companies to grow 20 per cent plus in the second quarter from the year-earlier period, according to FactSet. Historically, earnings per share (EPS) estimates are on the low side by approximately three to four per cent, suggesting that EPS increases could be as high as 23 or 24 per cent this quarter. Despite fears that earnings peaked in the first quarter, they are still on pace for the second-fastest rate of growth in nearly eight years. Revenue is also expected to impress, with projected growth of 8.7 per cent over the year prior—the fastest rate since the third quarter of 2011.

The buoyant outlook for earnings highlights the vigour of US corporations, now nine years into a domestic economic expansion. Gains from corporate tax cuts, a robust US economy and confidence among small business owners and consumers have given corporate earnings a fresh boost this year, helping offset headwinds like fractious trade policies and rising interest rates.

The results show the growth streak that has supported the long stock rally that isn’t over yet, something that should reassure investors headed into the busiest period of reporting season, which gets going shortly.

Earnings estimates move up

Rallying oil prices, strong US economic data and buoyant consumer confidence have pushed analysts’ earnings estimates higher since the start of the second quarter. This is a departure from previous quarters, when analysts typically lowered their expectations as they got closer to the start of earnings season.

Much of the boost has come from the S&P 500’s energy sector, which has rallied as dwindling oil production in Venezuela and fears of a supply disruption in Iran have sent US crude oil prices soaring above $70 a barrel again.

Energy companies in the S&P 500 are expected to post year-over-year earnings growth of 144% in the second quarter, up from 115% on March 31, according to FactSet. The upbeat outlook for profits has helped lift oil stocks.

The S&P 500’s technology stocks sector—the best performing group in the broad index this year—is also expected to impress. Strong sales momentum has analysts forecasting double-digit earnings growth for firms in the semiconductor, internet software & services, technology hardware, storage & peripherals and IT services industries.

Those broadly positive sector forecasts have helped offset cuts in earnings estimates for consumer staples stocks. Shares in that sector have slid in recent months as investors have worried that tariffs from Canada, Mexico and the European Union on goods ranging from orange juice to pork chops could dent profitability.

Analysts have lowered earnings estimates for about three-quarter of firms in the consumer sector since March 31, including Campbell Soup Co., Kraft Heinz Co. and Coca-Cola Co. Shares of consumer staples companies in the S&P 500 are down 9.1 per cent for the year, placing them among the worst-performing sectors in the broad index.

What I Recommend

Historically, analysts’ estimates tend to fall by, on average, two per cent going into earnings season. This time around by contrast, earnings estimates for the second quarter have risen modestly.

Heading into this earning season the cyclical names are expected to deliver the best results. Even after factoring out the tax benefits, the technology, financials, energy, materials and internet retail sectors of the market are expected to deliver double-digit earnings per share growth. Telecom, staples, and discretionary (ex-internet retail) sectors of the market are all forecast to deliver negative earnings per share growth this quarter.

The greatest value may well lie in financial services stocks this time around. While there are some very good reasons for shunning the sector, namely that the banks are highly-levered, heavily-regulated, cyclical-commodity companies with a history of suffering some unpleasant blowups every decade or so. But this time around things may be looking up for the sector, given the recent sell-off in the space. Banks historically trade at a price to earnings ratio of 73 per cent to 78 per cent of the stock market’s price earnings ratio, and today they are sitting at 64 per cent of the market.

The balance sheets of banks are the least risky than at any time in the past 30 years, while the returns are up. This suggests that the banks should revert to their historical discount to the market offering investors a healthy return from here.

Three stocks to buy

One stock I really like is PNC Financial Services Group (NYSE—PNC). PNC has $379 billion in assets and is one of the largest diversified financial services companies in the United States, headquartered in Pittsburgh, Pennsylvania. PNC has businesses engaged in retail banking and asset management, providing many of its products and services nationally, as well as other products and services in PNC’s primary geographic markets and internationally. The company is very well positioned for rising interest rates and is expanding its middle markets and corporate finance businesses into Dallas, Kansas City and Minneapolis. The bank has a continued focus on reducing operating expenses and non-interest income accounts for approximately 42 per cent of PNC’s total revenues, in line with top performing peers at 40-50 per cent or higher. I have a Buy rating and a twelve-month price target of $175 per share for PNC Financial Services Group.

Another name that I really like is manufacturing stock Micron Technology Inc. (NASDAQ—MU). The company is based in Boise, Idaho and is a manufacturer of semiconductor devices, primarily DRAM and NAND memory. The company has four business units. The Compute and Networking Business Unit includes memory products sold into computer, networking graphics, and cloud server markets. The Storage Business Unit includes memory and storage products sold into enterprise, client, cloud, and removable storage markets. The Mobile Business Unit manufactures memory products sold into smart-phone, tablet and other mobile-device markets. Lastly, the Embedded Business Unit produces memory products that are sold into the automotive, industrial, connected home and consumer electronics markets. The stock trades at just 11.72 times 2018 estimated earnings making it very attractive from a valuation standpoint.

While the semiconductor industry has a history of volatility, I believe the cycle(s) going forward will be more muted and less volatile. This means that memory companies should earn more profits and free cash flow over the cycle than historical trends would suggest. In part, this is because of the increasing capital intensity required for the business that limits the boom/bust nature of the business. Additionally, the DRAM industry has seen a severe consolidation, falling from 15 players in 1995 to just three today. As well, the market for DRAM has become more diversified. In 2007, the DRAM industry was driven by PCs, which accounted for 42 per cent of industry revenues. Today, PCs account for just 16 per cent of revenues while servers and other markets which are more secular in their content uptick, now account for 48 per cent of total revenues. The widespread adoption of smartphones now accounts for 37 per cent of sales today versus just 3 per cent a decade ago. I have a Buy rating and a twelve-month price target of $85 per share for Micron Technology, Inc.

Another company that I like is Amazon.com Inc. (NASDAQ—AMZN). Amazon is the largest global retailer on the Internet and operates in seven countries with over 300 million customers worldwide. Amazon should be able to realize continued market share gains. Already Amazon accounts for approximately 20 per cent of US Online Retail Sales, but the company’s strong mobile positioning and infrastructure advantages facilitating next-day and same-day delivery should allow Amazon to continue to take share. Margins should expand back to the 2003-2010 average 6 per cent level and to long-term levels in the high-single digit percentage range. I view scale, improved vendor terms, the ongoing mix shift to third-party sales, likely driven by Fulfillment by Amazon and Prime and Amazon Web Services as likely catalysts for gross margin expansion. Additionally, Amazon has one of the best management teams on the Internet given their consistency, operational and strategic track record, focus on innovation and customer service, and long-term shareholder orientation. I have a Buy rating and a 12-month price target of $1950 per share on consumer goods stock Amazon.com Inc.

The US fundamentals remain very strong, and even though this is one of the longest bull markets in history, the economic recovery is also one of the shallowest in history, suggesting that the bull market may go on for some time to come. While trade concerns rank high in the collective mindset these days, the US economy is without a doubt the strongest globally and earnings are likely to be very strong this quarter, which will help keep the fire lit under the stock market for the foreseeable future.

John Stephenson is an award-winning portfolio manager and the President and CEO of Stephenson & Company Capital Management Inc. in Toronto. He is the author of “The Little Book of Commodity Investing” and “Shell Shocked: How Canadians Can Invest After the Collapse.” He is also the publisher of Strategic Investor (www.StephensonFiles.com). He can be reached at (647) 775-8360 or (844) 208-8817, or jstephenson@stephenson-co.com.

This is an edited version of an article that was originally published for subscribers in the July 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/us-stocks/3-stocks-to-buy-in-a-continuing-bull-market/feed/0Are you richer than you think?https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think/
https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think/#commentsThu, 02 Aug 2018 18:58:38 +0000https://www.adviceforinvestors.com/?p=6868If China starts to sell a small portion of its holdings of US bonds and bills, US interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling
]]>If China starts to sell a small portion of its holdings of US bonds and bills, US interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling they are richer than they think.

Bank of Nova Scotia says it best: “You’re richer than you think.” What does it mean to ‘think’ you’re rich? In our never-ending quest to buy-low-and-sell-high, we recognize that optimism accompanies stock market tops, and that ‘thinking you’re rich’ is a form of financial optimism. How would we measure it? How do we measure how rich we feel?

Economists label that feeling ‘the wealth effect’. The wealth effect is the widespread belief that we are richer than we actually are. In other words, Scotiabank is wrong. And what makes us feel so rich? Our homes are worth more than we thought and our investments are all up. And what do we do when we feel rich? We spend more money than when we felt poor. We take more financial risk than when we thought we were poor.

In developing judgment about the stock market, it is important for us to objectively observe optimism in others while we remain detached. It is important for us to take less financial risk when everyone else feels richer, and take more financial risk when others are fearful.

Next time you drive through the streets of your home town, check out the cars. Are there more new luxury cars now than a year or two ago? What is the percentage of shiny new cars to rusty old clunkers? Is the wealth effect manifesting in the streets of your neighbourhood?

Check new car sales growth for 2018: the fastest sales growth was achieved by the Toyota Prius. (This is ‘environmental effect’, not wealth effect.) Second prize goes to the Porsche 911. Definitely wealth effect! “I feel rich; I will buy a new Porsche.” Check it out next time you go for a drive: Is the wealth effect evident in your own neighbourhood? How about your own drive-way?

The wealth of markets

Let us review the financial markets: just how wealthy are we?

The US stock market has calmed down again. After the wild volatility of February and March, June’s sluggish action is boring and is lulling investors back to complacency. Mr. Trump has given us enough economic news to slam-dunk this sleepy market. People know that trade wars have begun, but the market is not going down. American investors don’t believe the news. They’re not worried. Somehow, they feel safe. Don’t get caught off guard! The long-term uptrend of the S&P500 ended five months ago in January of this year and the first down tick of the new long-term down trend was violent. When the next leg of the downtrend begins, it could be just as violent as the one in February.

The TSX Composite Index made a marginal new high in June and is lulling Canadian investors into complacency. Don’t be fooled.

At the 2007-8 stock market top, investors knew about US mortgage problems, but didn’t react. Finally, the events of the day overwhelmed them and the downtrend began in earnest. Today we have the same situation regarding global trade wars: we know it’s happening, but most are not yet taking defensive action. (Defensive action means selling your stocks or equity mutual funds.)

On the cusp of a downtrend

In summary, both the US and Canadian stock markets are in the early stage of long-term downtrends.

Long-term interest rates (measured by the yield of long-term treasury bonds) are in long-term up trends in both Canada and the United States. The upturn began approximately 2 years ago and has been confirmed by rising short-term interest rates in both countries.

The US dollar, measured against the basket of non-US currencies, is in a downtrend that began in December 2016. Notice the stability of currencies as this global trade war begins. The US dollar has risen modestly since April, at the very time the Americans fired the opening salvos in the Battle of the Embargoes. Apparently, currency traders/investors collectively believe embargoes and counter-embargoes are moderately good for the US dollar. This is a good lesson in market psychology: negative or surprising news doesn’t necessarily make the markets move. Later in the cycle, news of yet another trade tariff will send currency markets into a tizzy. At this stage, the ‘complacency’ stage, bad news is mostly ignored.

The Canadian Dollar vs. US Dollar is in a long term up trend and is just ending a short-term decline within that up trend.

Gold is an interesting economic situation. In trade wars and currency crises, gold usually rises because people see it a safe haven. But not this time. Even though a global trade war has begun, the price of gold vs. US dollar continues to drift lower. Gold’s up trend started in December of 2015 with a sharp rise to August 2016. Since then, gold has moved sideways in a series of zigzags, each zig being smaller than the last. This chart pattern is called a triangle and illustrates constantly decreasing volatility.

Investors are gradually losing interest in the precious metals. Classically, the way a triangle resolves is by ‘breaking out’ of the pattern in one direction or the other. When emotion (i.e. volatility) returns to the markets, if gold moved decisively UP, the long-term uptrend will be confirmed. If it breaks decisively DOWN, a long-term down trend will be in effect. Stay tuned.

Theoretical note: Market forecasters analyze this situation and try to predict the direction in which the breakout will occur. Trend followers (like me) wait for the breakout. Right now, many forecasters are predicting gold will go up because of the trade wars. Forecasters and traders who think like this are ‘bullish’. Market psychologists observe their news-based opinion and call it ‘optimism’. They maintain that gold will continue its short-term decline until that bullishness changes to bearishness. This illustrates how the cross currents of the markets interact. One group has a perfectly logical opinion—a second group has another perfectly logical opposing scenario. And a third group, the trend followers, waits to see how the situation resolves.

Going forward

Energy prices. Oil has been in a long term up trend since Feb 2016, but natural gas has been in a down trend since June 2014. We expect both of these long-term price trends to continue.

Strategy. Buying and holding stocks or equity mutual funds for the long term is not a wise investment strategy at this time. It is time to reduce our exposure to risk. Remember what American advisor Richard Russell once said: “In a bear market, whoever sells first wins.”

Because interest rates are rising, invest in short-term bonds or GICs, not long term. But, if you still have a mortgage, abandon floating rate or short-term mortgages and choose the 5-year fixed rate mortgage.

Because the US Dollar is going down vs ‘the basket’ and the Loonie is going up vs. US Dollar, there is no clear currency advantage to participate in foreign investments.

Because gold is drifting sideways, we would not change our current precious metals investments until gold breaks out of the pattern mentioned earlier.

Energy stocks are a mixed bag: but the overall trend of the stock market is down. Resource stocks are for short-term traders only.

The wealth effect causes ordinary investors to take inappropriate action at exactly the wrong time in the economic cycle. But the most dramatic inappropriate action is at the international level. Mr. Trump, with his ‘bar-room brawler’ style of negotiating, is acting as if prosperity is a ‘given’. He assumes that America is prosperous and that he is negotiating from a position of strength.

But in his negotiations with China, he has forgotten one important fact: the Chinese are the world’s largest investors in US T-bills. America has been running a deficit for decades, and China is the main buyer of American debt. If China reacts to Mr. Trump’s tariffs and embargoes by slowing down their endless purchases of US debt, America might have to raise short-term interest rates to get their debt financed. And, if China stops buying US paper, interest rates could go significantly higher. And if China starts to sell a small portion of its holdings of US bonds and bills, American interest rates could go even higher. China has a very significant ‘ace in the hole’ and no one wants the country to play it. The only way China will play their ace is if they suddenly stop feeling they are richer than they think.

This is an edited version of an article that was originally published for subscribers in the July 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/us-stocks/are-you-richer-than-you-think/feed/03 oil & gas stocks to buy nowhttps://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now/
https://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now/#commentsTue, 24 Jul 2018 18:58:17 +0000https://www.adviceforinvestors.com/?p=6839PI Financial portfolio manager Guy Lapierre picks three oil and gas stocks and a sugar producer as his ‘best buys’. [ed.--How did a sugar producer get in with his oil and gas picks? Well, it is an energy stock of sorts, isn’t it?]
Before last winter’s correction hit, Vancouver-area PI Financial portfolio manager Guy Lapierre cautioned
]]>PI Financial portfolio manager Guy Lapierre picks three oil and gas stocks and a sugar producer as his ‘best buys’. [ed.--How did a sugar producer get in with his oil and gas picks? Well, it is an energy stock of sorts, isn’t it?]

Before last winter’s correction hit, Vancouver-area PI Financial portfolio manager Guy Lapierre cautioned investors to be careful not to burn themselves by hanging on to high-flying (especially US) blue-chip stocks for too long. At the time, the markets were still looking forward to better corporate earnings across the board.

A week after he shared his views in our pages, in late January, the market had transformed into the shakier animal that it is today. So, what now?

“Broadly speaking, our reaction to the market changes since we last spoke is, we’ve been looking to protect any profits,” says Mr. Lapierre.

Specifically, he has adjusted exposure to equity by 10 per cent in the portfolios he devises for his clients in favour of more fixed-income investments. At present, his growth portfolio is made up of 60 per cent equities and 40 per cent fixed income, while his growth and income portfolio consists of an even split between equities and fixed income.

Summing up his more defensive position at present, the portfolio manager says: “Fixed income is about getting your money back. Equity is about growth.”

Time to add some fixed-income securities

Mr. Lapierre points out that interest rates have risen over the last four months to five months, increasing his willingness to take on some longer-term fixed income investments, although he adds that he has avoided any bonds with a term five years or longer.

“That leaves us a little lighter on cash . . . but we’re quick to take profits on the equity side.

“We did some active trading with Apple, and we have some long-term positions that are still very profitable to sell, but not as profitable as eight months ago.”

Thus, he has added major corporate bonds yielding between four per cent and 4.5 per cent annually to his clients’ holdings, which the portfolio manager describes as an acceptable return under current circumstances. Mr. Lapierre has also invested in mortgage-backed securities yielding from seven per cent to 7.5 per cent annually.

The portfolio manager urges investors to pay attention to the ease of exiting from any fixed income investments they take on. “First and foremost is liquidity.”

The recent mortgage-backed securities that he bought into, for example, may be completely sold back to the issuer if necessary. “At a discount, of course, but we can get our money out.”

The greenback is still king

Mr. Lapierre notes as well that he is betting on an overall rise in the US dollar against other major currencies, including the loonie. International trade conflict or inflation would buoy the currency upwards, he says.

“There is no place to go. In a trade war, arguably the strongest hand is played by the Chinese.” However, the euro and yuan are both vulnerable, the portfolio manager argues. As such, he says, “We are proponents of the king dollar.”

As for gold (and its miners), he says: “We see gold as disconnected from inflation.” Mr. Lapierre asserts that gold price changes generally reflect shifts in the value of the US dollar rather than supply and demand issues specific to gold.

“I don’t see gold as a holder of wealth. There’s just too many other commodities you can trade like gold.”

3 oil stocks and . . . a sugar producer

Looking ahead over the next quarter to half-year, Mr. Lapierre says: “We’re constructive on select Canadian oil companies, the US retail banking sector, water in general, and the German economy in specificity.”

Explaining his endorsement of Pembina, he says: “It’s summed up in the absence of a pipeline to Tidewater.” The company’s pipelines are doing brisk business and its dividend yields 5.31 per cent, with little debt to hamper it. “We’ve added AltaGas, Pembina Pipeline, and Suncor Energy Inc. (TSX—SU; NYSE—SU), reflecting the strength in oil prices, partially attributable to Middle East tensions rising. These three fossil fuel investments provide significant dividend income.”

Regarding Rogers Sugar, a long-time, “high-conviction pick” for Mr. Lapierre, he notes that the company’s yield has become even sweeter since dropping about 22 per cent from a peak share price of $6.29 on Jan. 2. Since he was happy to recommend Rogers Sugar when it was more expensive, the portfolio manager says simply: “It’s cheaper, so we like it.”

(Disclaimer: Mr. Lapierre held no positions in any stocks named above at the time of writing.)

]]>https://www.adviceforinvestors.com/news/oil-and-gas-stocks/3-oil-gas-stocks-to-buy-now/feed/0Emotional vs strategic investinghttps://www.adviceforinvestors.com/news/us-stocks/emotional-vs-strategic-investing-2/
https://www.adviceforinvestors.com/news/us-stocks/emotional-vs-strategic-investing-2/#commentsThu, 12 Jul 2018 18:58:47 +0000https://www.adviceforinvestors.com/?p=6810‘Buy high, sell low, repeat until broke’ is an emotional investment strategy best left to lemmings. The MoneyLetter’s behavioural finance columnist Ken Norquay says feeling emotions is okay: reacting to those emotions is not okay.
Most of the time, our investment minds do what they have always done and think what they have always been thinking.
]]>‘Buy high, sell low, repeat until broke’ is an emotional investment strategy best left to lemmings.The MoneyLetter’s behavioural finance columnist Ken Norquay says feeling emotions is okay: reacting to those emotions is not okay.

Most of the time, our investment minds do what they have always done and think what they have always been thinking. But every once in a while some unexpected financial jolt occurs. That jolt makes us wish we had seen it coming: “If I’d known that was coming, I would have done it differently!”

In stock market analysis, there are two main ways of ‘knowing it was coming’. One way involves predicting the future; the other involves looking for patterns in the past. Most of the literature we see from the investment industry involves some type of forecasting, some type of predicting the future.

As a market psychologist, my approach involves looking at data from the past, trying to recognize repetitive patterns. Then we look for those repetitive patterns in the stock market data of the present. When we observe a market pattern, we assume it will play out in the future as it has in the past.

You’re the Top

Because the US and Canadian stock markets bottomed over nine years ago, in March 2009, we are currently looking for patterns that accompany market tops. Those patterns are a warning that a bear market is coming and it’s time to sell.

The most common topping pattern is called ‘the umbrella top’. First, the long-term up trend slows down, and then the market drifts sideways and slowly starts to sink, as the bearish part of the cycle begins. The chart is shaped like an umbrella. That pattern was in place over the period of October 2014 to February 2016.

A less common pattern is ‘the parabolic rise’, which occurred from February 2016 to January 2018. Sometimes referred to as ‘the spike top’, this pattern occurred in US stocks and in Canadian house prices. It indicates excessive speculation and is far more dramatic than the more common umbrella market top. For the record, the spike top in Canadian real estate was completed in June 2017. The spike top in the US stock market was in January 2018.

The umbrella top and the spike top are patterns in market prices over time. These topping patterns are always accompanied by a specific market mood, an attitude by investors about the market. At tops, the mood is optimistic. Investors expect to make money. Sometimes they worry that they will miss out on future profits. They tend to believe bullish market commentary and there is often evidence of extremes in speculation. In this current cycle, speculative excess is occurring in bitcoin/cyber-currencies and Canadian marijuana stocks. In real estate, it took the form of young speculators and foreign speculators buying several houses and renting them out, the renovation boom and ‘the condo flip’ phenomenon.

The psychology of this nine-year-old bull market has gone from worrying about bank failure to speculating in pot stocks and from worrying about the breakup of the European Common Market to a celebration of a re-surging American economic and military domination.

Is the Trend Your Friend?

Let’s review the long-term economic trends that most affect the financial fortunes of typical Canadian investors.

The US stock market: In January 2018, the US market peaked after a parabolic rise. The top is in. After a sharp short-term sell off, the market is stabilizing. A similar thing happened at the 2007 top: there was a sharp warning drop in August 2007, followed by a modest new high in October. The S&P500 dropped 57 per cent in the following 16 months.

The Canadian stock market is following its US counterpart and, after almost four years of underperformance, is starting to outperform again. The TSX Composite Index has gained back 80 per cent of its 2018 loss, the S&P500 only 66 per cent. We should expect the TSX to continue to outperform the NYSE throughout the whole bear market because speculative excess in the US was in the stock market, whereas the speculative excess in Canada was in real estate.

Long-term US interest rates as measured by the yield of US long-term treasury bonds: interest rates bottomed in the summer of 2016. The trend is now up.

Canadian long-term interest rates are moving in lock step with the US. These long-term up trends have been confirmed by up trending short-term interest rates.

The USD vs. the basket of non-US currencies has been in a downtrend since December 2016.

The CAD has been in an up trend vs. the USD since January 2016.

The price of gold in US dollars is in a weak long-term up trend, a weak medium-term down trend and a weak short-term up trend.

The price of oil in US dollars is up. Surprisingly, the price of natural gas is still in a long-term down trend. We normally expect these two commodities to trend in the same direction, confirming the overall trend of energy prices. Not so, this time. We interpret this divergence to be a caution flag for energy stock traders. It is likely that oil prices will peak soon and give way to a short-term down trend. Such an event would be bearish for energy stocks.

Strategy

For those who like to buy low and sell high, the market is high now. It’s time to sell.

For those who like to hold stocks through thick and thin, decrease your holdings of US and foreign stocks and increase your Canadian exposure: you will lose less this way. Note: if Canadian house prices start to fall dramatically, Canadian financial stocks will be affected negatively and the TSX may not outperform the NYSE in the bear market that lies ahead.

Traders in energy stocks should not take new long positions, and should review stop loss levels. Traders in gold mining stocks have noticed that there are very few stocks in short-term up trends. Nova Gold (TSX—NG), SSR Mining (TSX—SSRM; NASDAQ—SSRM) and Iamgold (TSX—IMG; NYSE—IAG) are worthy of attention.

Traders: shift your attention to exchange traded funds representing bearish positions in various stock markets. Read up on them: become familiar with them. Make sure your trading rules still work in these types of market instruments.

More Strategy: ‘Keeping your cool’ is not just a slogan: it’s an investment strategy. We all know that investors get greedy at market tops and fearful at market bottoms. ‘Keeping cool’ is another way of saying, ‘Don’t get greedy’ and ‘Don’t get fearful’. Easy to understand, but how do we do it?

Mindfulness

In my stock market book, Beyond the Bull, I write about the art of being mindful—the art of remaining objective about our investing. Mindfulness or objectivity is a learned skill. We learn to observe our own mind. In this case, we learn to observe our own emotions: Are we greedy? Are we fearful? Greedy means we worry that if we sell, we will miss out on some easy profit. Fearful means we are worried that we will lose everything. Or we are worried that we might sell at the exact bottom. We say things like: ‘I haven’t lost until I sell’. Or we say: ‘If I sell, I’ll have to pay taxes’.

Objectivity training involves observing ourselves as we make statements like these and checking the underlying emotion. If the market has gone down a long way, we are probably feeling fear of losing, regret of having lost or fear of missing the inevitable reversal from down to up. If the market has gone up a long way, we are likely feeling greed. Easy money makes us greedy. But who wants to admit they are greedy? Who wants to admit they are worried about losing? That’s why we rarely examine our own emotions.

How do we overcome this ironic investment problem? First, we allow ourselves to feel our emotions: fear and greed are normal emotional responses to profits and losses. Yes, feel our emotions of fear and greed. BUT—we do not take those emotions into account when making our investment decisions. We buy and sell based on a previously thought out investment plan. It’s a plan that includes both buying and selling. It observes specific data and responds to the buy or sell signals generated by that data. Investment decisions are not based on emotion: there is no need to deny our feelings about the ups and downs of the market. Feeling emotions is okay: reacting to those emotions is not okay.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the May 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/us-stocks/emotional-vs-strategic-investing-2/feed/02 stocks with high dividendshttps://www.adviceforinvestors.com/news/oil-and-gas-stocks/2-stocks-with-high-dividends-2/
https://www.adviceforinvestors.com/news/oil-and-gas-stocks/2-stocks-with-high-dividends-2/#commentsThu, 28 Jun 2018 18:58:06 +0000https://www.adviceforinvestors.com/?p=6769A global oil and gas stock that yields about six per cent and a financial services stock yielding about 10 per cent are Toronto-based portfolio manager Michael Sprung’s two favourite stock picks. He says Canada “is very well-positioned to participate in a global economic recovery”.
While volatility since winter “may or may not be indicative of
]]>A global oil and gas stock that yields about six per cent and a financial services stock yielding about 10 per cent are Toronto-based portfolio manager Michael Sprung’s two favourite stock picks. He says Canada “is very well-positioned to participate in a global economic recovery”.

While volatility since winter “may or may not be indicative of a protracted market downturn”, it does signal shifting investor priorities, suggests Michael Sprung, founder of Sprung Investment Management in Toronto. He is a chartered financial analyst who serves as president and a portfolio manager at his namesake boutique investing firm.

Elaborating on the shift, Mr. Sprung explains: “I’d very much describe the last year as price-driven markets.” That is, investors largely put money into companies simply on the basis that their shares were rising, thus further inflating prices.

The portfolio manager notes that the major technology stocks and other, more speculative corners of the economy (such as medical marijuana stocks) had driven most of the increases over the last couple of years up to January, despite relatively negligible or even negative earnings. Investors during the period chose to bet on future growth.

By contrast, the recent ups and downs are “forcing people into more higher-quality securities,” says Mr. Sprung. “It’s going to be much more of a ‘show-me’ kind of a market where people are going to want to see the road to earnings and the road to profitability,” he predicts before adding: “Quality of earnings is going to become much more important.”

Avoid tech stocks and long-term fixed-income

The analyst advises against holding the major technology stocks, as well as stocks in emerging industries, given their room to fall. He further recommends that investors avoid taking long positions in fixed-income investments, especially as interest rates rise and capital moves to other areas of the market in anticipation of growth. “We are very short in almost all of our fixed-income investments.”

Generally speaking, the larger economic outlook remains healthy, with a caveat. Mr. Sprung recalls that before the pullback in winter: “Everybody was talking about synchronized global growth from an economic point of view.”

Key to this rosy prognosis was simultaneous growth in both emerging and developed economies. In fact, the consensus expected better worldwide economic expansion this year than in the last five. However, Mr. Sprung admits: “A lot of that future will be dependent on the global trade issues.”

In Canada, the picture is also sound. “The country is very well-positioned to participate in a global economic recovery,” says the analyst. If NAFTA negotiations are positive, closeness to US growth further sweetens prospects back at home.

The analyst argues that the energy sector offers the best domestic potential for share prices to rise. After years in the doldrums, the energy sector is rising again. Because of the previous slump, many oil and gas stocks offer good value to shareholders, Mr. Sprung argues. “Those that have had stronger balance sheets and better management have been able to take advantage of some of the opportunities that have come up.”

2 stocks with high dividends

Reflecting this view, his first ‘best buy’ pick is Vermilion Energy Inc. (TSX—VET; NYSE—VET). The oil and gas stock is very well-diversified with operations in Canada, Australia, France, the Netherlands and more.

Vermilion is able to generate free cash flow at current energy prices and its balance sheet is “very solid”, enough to recently hike its dividend by seven per cent to $2.76 a share annually.

“Given their position, this is a company that has proven itself to be very savvy,” says Mr. Sprung. He praises Vermilion’s investment in Spartan Energy Corp. assets on “very, very advantageous terms” and points out that its Australian presence means it can serve emerging markets in the Far East. “It is one that people should seriously consider.”

Both Vermilion and financial services stock Alaris Royalty Corp. (TSX—AD), Mr. Sprung’s second ‘best buy’, boast very high dividend yields, meaning that shareholders can look forward to being paid nicely even if the wait for price gains turns out to take longer than hoped.

The analyst says of Alaris: “It’s a company that’s selling at a compelling valuation.” He explains that shares took a lasting hit because of issues at several underperforming companies in the Alaris stable. (The company makes capital investments in other firms in exchange for ownership of preferred shares.)

Its lofty dividend yield stoked further share-depressing fears of a cut. However, only five out of 16 Alaris partners were underperforming, and Alaris has already largely resolved the under-performers’ cash flow problems, according to Mr. Sprung. “As they deploy more funds going forward, they will create more cash flow and there will be more dividend increases possible,” he predicts, leading the market to notice the positive trend coming into play.